Japanese Commercial Real Estate Prices Still Declining

1/24/2011 | By Allen Kenney
While major markets around the world are showing signs of stabilizing, commercial real estate values in Japan continue to fall, according to data from market research firm IPD.

In the two-and-a-half-year period ending September 2010, the IPD Japan Monthly Indicator, which reflects commercial real estate values in the country, showed capital depreciation of approximately 20 percent.

As of September, the most recent data available, property values in Japan had declined 6.3 percent for 2010. Meanwhile, capital growth had turned positive in the United States, United Kingdom and Australia during that same nine-month span.

“There is no immediate end in sight to the two-and-a-half-year unbroken period of capital write-downs,” said Toshiro Nishioka, managing director of IPD Japan. “Each quarter brings, at best, modest improvements. The market would benefit from increased transactions, which would boost confidence and provide a deeper insight into the property fundamentals.”

In the midst of weak economic growth in the country, the Japanese office sector is experiencing the greatest struggles. Offices were down 8.3 percent through the first three quarters of 2010. The retail real estate sector had the smallest 2010 decline during that same period with an annual capital loss of 2.8 percent. Residential prices fell 4.5 percent through the first nine months of the 2010 calendar year.

Peter Mitchell, CEO of the Asia Pacific Real Estate Association (APREA), attributed some of the ongoing malaise in the Japanese market to the country’s culture. He noted that as “a country of mild socialism that avoids radical change,” the commercial real estate industry in Japan prefers a mark-to-market valuation approach.

“Hence, changes in property values are always moderate and always comes through later than in, say, the U.S. market,” Mitchell said.

Mitchell also pointed out that Japanese REITs (J-REITs) didn’t have the same ability as U.S. REITs to raise equity capital in 2009, impacting the market's performance throughtout the period covered in the IPD data. However, share prices have experienced a significant bounce-back since October, he said, stimulating equity offerings in the market.

“Due to the time lag in the Japanese real estate market caused by the very cautious (valuation) approach and data collection lag, industry indicators may not show a turnaround until 2012,” Mitchell said. “But the real market and REITs’ activity have already turned around.”

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